Chapter 7Fiscal Effort

Fiscal Effort• Fiscal effort measures how much a

locality, state, or nation spends of its resources in relation to capacity – or their ability to pay

Capacity & Effort• Measuring

capacity is a good place to start examining how much a nation, state, or locality can afford to spend on education

• The relative effort of that spending – the degree of fiscal exertion a community commits to its education resources – tells a much more robust story about what people value

Relative Fiscal Capacity & Effort

Effort

High

Low

Low High

High Capacity/Low Effort

High Effort/High Capacity

Low Effort/Low Capacity

High Effort/Low Capacity

Relative Effort For example, poorer school

districts can spend a greater share of their wealth on education while more affluent school districts can spend relatively little to support their schools in order to achieve the same level of services for the children.

Measuring Fiscal Effort in Relation to Wealth

• Is it right for the state to determine a minimum local effort required before a community is eligible to receive state funds?

• Can and should states “cap” local contributions to education – in effect saying to the locality that if they levy additional taxes, those monies must go back to the state to raise the floor of educational opportunity for other localities?

Measuring Fiscal Effort in Relation to Wealth

• Is it right for the Federal government to establish high academic standards that all students must meet regardless of a locality’s capacity or effort to provide?

Many Dispute How Much We Should Spend on Education

• Some believe that we spend too much on education for the results we obtain • Others thinks that our spending

does not reflect the priority we should place on

education as an investment in human capital

US Capacity & Effort Does the United States spends more than any other country on education?

No. This is only true if we include higher education spending figures.

Education Spending International Comparisons: 1988

US Education Spending in International Comparison

• Austria & Switzerland outspend the U.S. in secondary

education while Austria, Denmark, & Switzerland

outspend us at the primary level in relation to GDP on a per capita basis.

To say that we spend more on K-12 education than any other country is not true & distorts public perceptions about the results of our fiscal efforts in education.

Education Spending as a % of GDP

• Another way to look at our national education expenditures is to examine what we spend as a percentage of our GDP

• When we examine spending as a percentage of the whole, we can see our national priorities

For example,• If a family of four

earning $60,000 spent 50% of their gross income on their home mortgage, we could say that having a nice home was a priority for them.

50% of gross income = mortgage

For example,

30% of income=mortgage • If another family spent 30% of their income on their home and gave 20% to their local church, we could say that their home & church were important parts of their value system

20% of income = church

For example,

10% of income=dining out

• If another family spent 10% of their income on dining out in comparison to the first two families who prepared & ate most meals at home, we could say that restaurant eating was important to the last family

We Spend $$$ on What We Value

Likewise, examining education expenditures in this light shows the relative importance countries place on educating their children.

Relative Education Expenses in International Comparison

Seeing National Priorities in GDP

• The United States does not rank in the top five countries when examining spending in this light

• In fact, Sweden, Norway, New Zealand, France, Portugal, Canada, and Switzerland outspend the United States in GDP

How Do We Compute Effort?

Effort is best described as a ratio of school revenue (expenditures) to the overall tax base, or,

Revenue Effort =

Tax Base

Computing Effort as a Ratio• Without

comparing revenue against the tax base, only the dollars contributed – rather than the capacity – would be examined

• Even if those dollars were based on a per-pupil expenditure, wealthy districts spending just a few dollars more per pupil would always look like they were exerting more effort than any other school district

Computing Effort as a Ratio, cont.

• These dollars must be examined in light of their capacity to fund education

• We do that by making the figure a ratio taking the tax base into account

Computing Effort is Complex• Effort must be computed on the basis of

nations, states, or localities • Computing effort by summing the local,

state, and national tax revenues mixes apples, oranges, and nuts

• It misrepresents the overall picture

Computing Effort Appropriately

• One purpose of state funding is to equalize for local disparities in ability to pay for education

• A poor locality not putting much effort into education is made to look better if we include state funding

• The state has greater wealth than this poor locality. Adding the state funding will make the locality look better in terms of effort

Computing Effort Appropriately

• Therefore, to add state funding to the local funding in order to compute the effort ratio is a flawed concept

• Each level of funding must be computed on its own level

Computing Effort Appropriately, cont.

• On the other hand, richer states putting the same fiscal effort into education as poorer states will always “look” better in terms of effort unless we consider capacity

• The same is true for nations. That is why we looked at national spending relative to GDP

Comparison of Two Districts School District A School District B# Pupils 10,000 10,000

Per Capita Residential Property Value $ 50,000. $ 50,000.

Total Per Capita Property Value $ 75,000. $100,000.

Per Capita Income $ 75,000. $ 60,000.

Per Pupil Spending $ 6,000. $ 7,500.

Computing Effort Using Per Capital Property Tax

R $ 6,000. $ 7,500.TB $ 75,000. $100,000.

E = .08 .075

School District A School District B

Using effort in relation to the per capita real estate tax base, School District A expends greater effort than does School District B. District A has 1/4 less property value yet spends only 20 percent less to educate each student.

Computing Effort

• In terms of effort in relation to the tax base of per capita real estate, School District A expends greater effort than does School District B – .08 compared with .075

• School District A has 1/4 less property value than School District B yet spends only 20 percent less to educate each student

Computing Effort Using Per Capita Income

R $ 6,000. $ 7,500.TB $ 75,000. $ 60,000.

E = .08 .125

School District A School District B

School District A (.08) has a lower effort ratio than School District B (.125). In terms of income available as a tax base, School District B displays greater fiscal effort than does A.

States Vary in How TheyFund Education

Many states do not use real estate value as a sole means to establish capacity to fund education.

Virginia, for example, uses a composite index of real estate, income, and sales tax on a proportional basis to calculate the ability of a locality to fund education.

Wealth is a Measurement of Many Variables

To look at capacity with only one measure – real estate value or income – would be a mistake.

Legally & statistically, it would NOT provide an accurate

measurement of a locality’s capacity

Wealth as a ratio: 50% Income & 50% Property

School District A School District B

# Pupils 10,000 10,000

Per Capita Residential Property Value $ 50,000. $ 50,000.

Total Per Capita Property Value $ 75,000. $100,000.

Per Capita Income $ 75,000. $ 60,000.

Per Pupil Spending $ 6,000. $ 7,500.

Computing Effort 50/50 Split:Income & Property

R $ 6,000. $ 7,500.TB $ 75,000+$75,000 $100,000+$

60,000.

E = .04 .046875

School District A School District B

School District A has an effort index of .04 while School District B has an index of .046875, the greater number indicating the greater effort.

Wealth as: 50% Property, 40% Income, 10% Sales Tax

School District A School District B

# Pupils 10,000 10,000Per Capita Residential Property Value $ 50,000. $ 50,000.

Total Per Capita Property Value $ 75,000. $100,000.Per Capita Income $ 75,000. $ 60,000.

Per Capita Sales Tax $ 2,500. $ 1,000.

Per Pupil Spending $ 6,000. $ 7,500.

Computing Effort 50/40/10:Income, Property, & Sales Tax

R = $ 6,000. TB $ 75,000 (.5)+$75,000 (.4)+$2,500

(.10) =

or $ 6,000. $67,750.E = .088560

School District A

Computing Effort 50/40/10: Income, Property, & Sales Tax

R = $ 7,500.TB $100,000 (.5)+$ 60,000 (.4)+ $1000

(.1)=

or $ 7,500. $ 74,100.E = .101215

School District B

Using Multiple Criteria for Determining “Wealth”

• Using multiple criteria

for determining wealth

is complicated, but

• They are a better statistical measure for determining wealth, allowing improved comparisons for determining effort

States Decide Multiple Measures of Wealth

• States can use whatever multiple measures of wealth they deem appropriate

• Many different and complex formulae exist to measure wealth, and they vary from state to state

In Sum, Effort Indices Vary School District A School District B EFFORT INDEX EFFORT INDEX

Property Only .08 .075

Income Only .08 .125

Property & Income .04 .04675(50/50)Property, Income &Sales Tax (.5+.4+.1) .088560 .101215

Measuring Relative Wealth

• A nation’s relative wealth is usually expressed in Gross Domestic Product

• It is more difficult to measure State Domestic Product; therefore, states & localities typically measure relative wealth by per capita income or per capita property value. Many include sales tax, especially in tourist areas.

Factors Influencing Effort to Fund Education

• 1 - The public’s interest & attitude about their public schools

• 2 - How people feel about taxes in general

• 3 - How citizens “feel” about their schools

• 4 - The % of the population having their children in public schools vs. private schools

Factors Influencing Effort to Fund Education, cont.

• 5 – The % of the population with children or grandchildren attending the public schools in that locality

• 6 -When trusted & supported leadership advocates for public education goals

Factors Influencing Effort to Fund Education

• According to Alexander & Salmon,

“No one has been able to determine, up to this time, the effects of any one factor, or the combination of factors…, upon the fiscal effort made by any state to support its public schools.”

“Tax Effort”

• A more appropriate way to compare the relative burden of state and local taxes

• Considers what each state would raise if it & its local governments would raise and applied national average tax rates to their own tax bases

• This “representative tax system,” is tedious and expensive to apply”

State & Local Tax Effort, 1996State Tax Effort % Rank___

Alaska 116 4California 101 15Connecticut 115 5Florida 90 32Illinois 97 25Nevada 73 50New York 141 1Wyoming 74 48

Making Such Comparisons is Misleading

• The capacity of states to raise revenue varies broadly

• Some states derive large revenues from:– Severance taxes

from oil & gas – Casino gambling – Businesses

incorporated

• Most other states obtain little revenue from such sources

Federal Funding for K-12 Education Has Increased

K-12 Federal Funding

1965 $ 1,942.601975 $ 10,617.201985 $ 16,901.301995 $ 33,623.802002 $ 53,334.60

State Effort to Fund EducationHighest Effort 1 West Virginia

8 New York10 Michigan 21 Massachusetts34 Nebraska36 Texas42 California

Lowest Effort 50 Colorado

Fiscal Effort Tells About a State’s Values• By computing the effort index, the

relative effort among states can be computed on an equalized basis and compared fairly

• We can then determine which

states value the next generation’s education